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Colorado students to take financial hit as college loan rates double

People walk on the Columbia University campus on July 1, 2013 in New York City. An interest rate hike kicks in today for student loans, an increase for 7 million students. (Mario Tama, Getty Images)

As a first-generation college student, Sara Diaz admits to having no idea about money and finances when she graduated from high school in 2007.

"I thought, 'Wow, free money,' " she recalled Monday.

But six years later, the senior at the University of Colorado Denver knows differently. She's already got $45,000 in debt and expects to have to take out more federal student loans — and those new loans are going to cost her more money.

Monday marked the day when the interest rate on subsidized Stafford loans from the federal government doubled from 3.4 percent to 6.8 percent. According to the National Education Association, the increase means student borrowers will be adding about $1,000 each to their debts over the life of their loans.

While officially taking effect on Monday, there's a chance for a reprieve — Congress will vote next week on a bill that would keep the rate at 3.4 percent.

"I'm not too hopeful about that happening," said Cindy Hejl, director of financial aid at Metropolitan State University of Denver. "This has been a political battle, and I don't see any sense of there being an agreement between the two parties."

In Colorado, about 154,000 students have taken out Stafford loans, with an average debt of just under $25,000, according to the Center for American Progress, an independent, nonpartisan think tank based in Washington, D.C. According to Hejl, Metro State has averaged between 11,000-12,000 students taking out subsidized loans over the past three years, at about $4,000 a year.

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Subsidized loans, where the government makes the interest payments while a student is in school, are based on financial need. Any student can take out an unsubsidized loan, but they must cover interest payments while in school or let the interest accrue. Those unsubsidized loan rates have been 6.8 percent and will remain at that same rate. Undergraduate students can take out a maximum of $57,500 over four years.

Hejl said Metro and other schools have long tried to impress upon students the need to be cautious about accruing debt and that will be a renewed point of emphasis in the wake of the interest rate increase.

However, she added, students looking for money, aren't necessarily concerned about the long-term costs of borrowing

"It doesn't really hit them until it's time to repay the loans," Hejl said.

Diaz admitted that was the case with her.

"I changed majors a few times and screwed around and didn't do what I needed to do," she said.

Even so, while the bottom line might possibly be lower, Diaz said that even while holding a steady job, there's no way she could navigate college without borrowing the money.